State of Illinois FY2020 Budget Roadmap

AT A GLANCE

Prior to the release of the Governor’s annual budget recommendation, the Institute for Illinois’ Fiscal Sustainability at the Civic Federation releases an analysis of the State of Illinois’ fiscal condition. This report presents the Civic Federation’s multi-year plan to stabilize Illinois’ finances.

EXECUTIVE SUMMARY

The State of Illinois FY2020 Roadmap describes the State of Illinois’ fiscal condition and presents the Civic Federation’s proposed five-year plan to stabilize the State’s finances. The report is published annually before the Governor’s budget address for consideration by the Governor and General Assembly during upcoming budget deliberations.[1]

More than ten years after the end of the Great Recession, the State of Illinois’ fiscal condition remains precarious. A chronic mismatch between revenues and expenditures persists despite a recent increase in income tax rates. The mountain of unpaid bills continues to grow even after the State borrowed billions of dollars to shrink the backlog.

The biggest challenge continues to be staggering public employee pension costs, which are difficult to reduce due to State constitutional protections as interpreted by the Illinois Supreme Court. At the end of FY2018, the five funds had $133.7 billion in unfunded liabilities; only about 40% of promised pension benefits were covered by pension assets.[2]

Illinois also faces a declining population and an urgent need to repair and improve its transportation infrastructure and state facilities. As a result of the State’s problems, Illinois carries the lowest General Obligation credit ratings of any State.

With the beginning of a new gubernatorial administration and many first-time lawmakers in Springfield, the Civic Federation urges Illinois leaders to enact fundamental changes that are long overdue. A revenue system that increasingly burdens a narrow base and does not reflect economic shifts must be updated. A State Constitution that locks in employee benefits based on unsustainable promises must be amended. Fragmented and duplicative units of government need to be consolidated. Illinois’s habit of hiding its long-term financial problems with budget gimmicks and illusory reforms must end.

The Civic Federation offers the following recommendations to begin stabilizing the State of Illinois’ financial position:

Issue 1: Spending Controls

The Civic Federation recommends that the State of Illinois limit net agency spending growth to 2.4% annually through at least FY2024 and pursue reasonable savings in State employee salary increases and health insurance costs.

Issue 2: Retirement Income Exclusion

The Civic Federation recommends that the State of Illinois broaden its income tax base by eliminating the tax exclusion for all federally taxable retirement income. This will enhance the State’s fiscal stability by providing access to a faster growing portion of the income tax base, generating FY2020 revenues of over $2.5 billion.

Issue 3: Sales Tax on Services

The Civic Federation recommends that the State of Illinois expand the sales tax base to include the fourteen services taxed by the State of Wisconsin.

Issue 4: Rainy Day Fund

After the backlog of bills is paid off, the State of Illinois should work toward building a rainy day fund equal to 10% of General Funds revenues to cushion the budget from the next economic downturn. Legislation must explicitly indicate when deposits will be made and in what amount and the circumstances under which withdrawals will be allowed.

The Illinois General Assembly should vote to place a constitutional amendment on the ballot no later than the 2020 general election that would limit the pension protection clause and allow reasonable, moderate changes to current employee and retiree benefits necessary to secure the financial sustainability of the State and local governments and the pension systems themselves.

Issue 6: Supplemental Pension Payments

In order to mitigate the underfunding of the State’s pension systems due to inadequate statutory payments, the Civic Federation recommends identifying revenues to make annual supplemental payments sufficient to reach 100% funding by FY2045.

Issue 7: Merger of the Chicago and State Teachers’ Pension Funds

The Civic Federation recommends that the Chicago Teachers’ Pension Fund be consolidated with the Teachers’ Retirement System and that the State assume responsibility for the unfunded liability of CTPF. The Federation also recommends that the Chicago Public Schools resume paying for the normal cost of Chicago teachers’ pensions and that responsibility for the normal cost of pensions for all teachers outside of Chicago be shifted from the State of Illinois to local school districts over three years.

Issue 8: Pension Investment Expense and Asset Allocation

The Civic Federation recommends that the Illinois General Assembly create a commission to review the investment operations of the State’s public pension funds, including investment expenses, asset allocation and investment approach, with the goal of improving fund performance and transparency.

Issue 9: Restructuring Illinois’ Public University System

The Civic Federation recommends that the Governor create a bipartisan commission to address the need to allocate resources more rationally among the State public universities. The commission should propose a new funding formula and consider the elimination of duplicative programs and the potential need to close or consolidate campuses. The Federation also recommends that the nine universities be governed by a single Board of Trustees to facilitate the establishment of statewide goals and rational allocation of State resources.

Issue 10: Prisons

The Civic Federation recommends that the Governor and General Assembly continue to implement reforms designed to lower Illinois’ prison population, not only to achieve widely acknowledged social benefits, but also with the goal of safely and legally generating meaningful cost reductions.

Issue 11: Interest Penalties on Overdue Bills

The Civic Federation recommends that the State reduce the late payment penalty in the Prompt Payment Act to a rate that reflects lower economy-wide rates of return, such as the five-year Treasury rate plus one percentage point. The General Assembly and Governor should also consider a reduction in the timely payment rate in the Insurance Code.

Issue 12: Consolidating and Streamlining Government Units in Illinois

In addition to recommending the merger of CTPF with TRS, the Civic Federation supports the following government consolidation initiatives:

Consolidate local pension funds;

Merge the offices of the Illinois Comptroller and Treasurer;

Authorize any township to be dissolved by referendum;

Consolidate property tax administration roles in Cook County; and

Dissolve the Illinois International Port District.

Issue 13: Comprehensive Capital Improvement Planning and Funding

The Civic Federation recommends that before State of Illinois embarks on a new capital plan, it should comprehensively assess and prioritize its needs for both transportation infrastructure and State facilities. In addition, the State should identify reliable, long-term funding sources. The road and transit portion of the plan should be initially funded by an increase in the motor fuel tax, which has not been raised since 1990. The State should further consider vehicle miles traveled and congestion taxes to ensure the long-term sustainability of transportation funding revenues. The State facilities portion of the plan will require other sources of funding, and these must be more reliable than those used for the FY2010 Illinois Jobs Now! capital plan.

Issue 14: Prudent Budget Practices

The Civic Federation believes it is important to warn against certain unwise budgetary practices that have been used in the past and imprudent steps that might be under consideration for the future, such as:

Implementing new revenue sources without proper consideration of their reliability and social impact; and

Ignoring the condition of local governments.

[1] Governor J.B. Pritzker is scheduled to present his budget proposal for FY2020 on February 20, 2019. The State of Illinois’ fiscal year begins on July 1 and ends on June 30.

[2] Illinois General Assembly, Commission on Government Forecast and Accountability, “Special Pension Briefing,” Monthly Briefing for the Month Ended: November 2018, p. 2., http://cgfa.ilga.gov/Upload/1118%20SPECIAL%20PENSION%20BRIEFING.pdf (last accessed on February 12, 2019). This figure is based on the actuarial value of assets, which involves asset smoothing; based on the market value of assets, the unfunded liability was $133.5 billion.